The main legal aspects can be summarised in terms of assets and liability, as business owners may be subject to different degrees of liability depending on the chosen business structure and may, in certain circumstances, be personally liable with their private assets.

In this respect, in the case of sole traders there is no separation between the owner's private assets and business assets, whereas a company has assets that are entirely separate from those of its shareholders, as the company is an independent legal entity. It is precisely this separation between the assets of the company and those of its shareholders that constitutes one of the key legal differences between sole traders (Autónomos) and limited liability companies (S.L.).

Liability Risks for Sole Traders

a) Liability with private assets: Autónomos are generally liable with all their assets (both business and private) for all their obligations. Although claims by customers resulting from errors in products or services can often be covered by appropriate insurance policies, other liabilities, such as tax debts and Social Security contributions, generally remain subject to full liability and normally cannot be insured or cannot be fully covered by insurance.

b) Liability involving marital assets (community property): In addition to their private assets, sole traders may also be liable with marital assets where the applicable matrimonial property regime provides for jointly owned property. Liability may be limited to half of the marital assets if this circumstance is recorded in the Commercial Registry (Autónomos are not normally registered in the Commercial Registry) or if there are no jointly owned marital assets due to a separation of property regime.

Liability of Shareholders

In limited liability companies, shareholders are generally liable only up to the amount of their contributed share capital. However, in the following cases, liability may arise in relation to assets received from the company. In such cases, shareholders may be liable with their private assets, although this liability is limited to the amount received from the company:

a) Dissolution of the company: Each shareholder remains liable for 5 years up to the amount of assets received from the company as a result of its dissolution.

b) Leaving the company: If a shareholder leaves the company, they may, similarly to the case of dissolution, remain liable for 5 years for possible debts up to a maximum amount corresponding to the amount received for their shares.

c) Remuneration: If remuneration is considered not to comply with the arm's-length principle, liability for the company's tax debts may also arise for a period of up to 2 years.

d) Capital reduction with repayment of contributions: Assets received as a result of the repayment may also remain liable for company obligations for a period of 5 years.

e) Companies in the process of incorporation (irregular companies): As companies do not have their own legal personality until they are registered in the Commercial Registry, shareholders may be liable for debts incurred during this period. Since, when a company is incorporated through a PAE, there are generally only 24 hours between incorporation and registration in the Commercial Registry [Article: Timeframes and Deadlines for an S.L.], this liability is becoming increasingly less relevant.

f) Share capital contributed in kind: If a contribution in kind is overvalued, both the company's directors and the shareholder may be liable for the difference between the declared value and the market value.

g) Single-member company: If the company's status as a single-member company is not registered in the Commercial Registry, the sole shareholder may become fully liable with their private assets.

h) Piercing the corporate veil: In cases involving abuse of legal personality and the deliberate avoidance of debts, shareholders may become personally, unlimitedly and jointly and severally liable with their private assets where the company's separate legal personality has merely been used as a means of unlawfully protecting the shareholders' assets. Such liability can only be established through court proceedings and may also have criminal consequences for the persons involved.

Liability Risks for the Sole Shareholder of an S.L.U.

The liability of the sole shareholder of a limited liability company is also limited in this case. The shareholder is therefore generally liable for the company's debts only up to the amount of the share capital and not with their private assets. Direct liability of the sole shareholder of a single-member company (S.L.U.) may arise only in the following cases:

a) Liability for the company's debts where the company is incorporated as a single-member company or subsequently becomes a single-member company as a result of a transfer of shares, if this circumstance is not registered in the Commercial Registry within 6 months. It should be noted that the sole shareholder of a single-member company, like the company's directors, is identified by name and publicly recorded in the Commercial Registry.

b) Liability for transactions between the single-member company and its shareholder if these are not recorded in writing and duly documented in accordance with the applicable registration requirements.

Liability Risks for Company Directors

Since in most small and medium-sized enterprises (SMEs) the management of the company is carried out by one or more shareholders, the liability of company directors is also relevant in addition to the liability arising in the case of a single-member company. Directors have a number of duties towards the company, third parties and public authorities, and failure to comply with these duties may also have legal consequences:

a) Breach of the duty of care: The duty of care may be breached if directors fail to comply with their legal obligations or fail to obtain an adequate understanding of the company's situation. Directors may rely on third parties such as lawyers, auditors or tax advisers and can thereby reduce certain liability risks.

b) Breach of the duties of loyalty and confidentiality: Directors must represent the company in good faith without obtaining a personal benefit from the company's transactions. They must also maintain confidentiality regarding business secrets and must not use company information for private purposes.

c) Avoidance of conflicts of interest: Conflicts of interest between directors and the company may arise particularly in the following cases:

a. Transactions between directors and the company that are not carried out on arm's-length or market terms. Remuneration must also be assessed in this context, an aspect that is addressed specifically in our other articles.

b. Using the position as a director or the company's name to obtain a personal benefit.

c. Using company assets for private purposes or accepting gifts from third parties by shareholders or members of their families.

d) Liability of directors for failure to act when a cause for dissolution arises: A cause for dissolution exists where the company's net assets fall below half of its share capital.

e) Liability of directors for failure to act in the event of insolvency where, after becoming aware of payment difficulties, insolvency proceedings are not initiated within the applicable legal period.

f) Liability of directors in relation to tax debts and Social Security debts. Directors and third parties may be held liable for debts owed to the tax authorities in the following cases:

a. Where they actively participate in the commission of criminal offences or administrative tax infringements.

b. Where they conceal or remove funds or assets from the reach of the tax authorities in order to avoid the payment of tax debts.

c. Where they act as liquidators or insolvency administrators and fail to settle debts owed to the tax authorities.

Reducing Liability Through Delegation and Preventive Measures

As explained in the previous sections, operating through a limited liability company reduces potential personal liability, although certain liability risks may continue to exist, particularly in the case of a single-member company or where shareholders are also involved in the management of the company. However, since many of these liability risks arise from management responsibilities and non-compliance with formal requirements, they can be eliminated or at least minimised through appropriate professional advice and by delegating certain functions to external service providers:

1. Liability arising from incorrect bookkeeping, annual accounts, failure to pay taxes, non-payment of Social Security contributions, etc.:

This liability can be significantly reduced if an external service provider (tax adviser and accountant) is entrusted with the relevant tasks. Due to the case law concerning "culpa in eligendo", i.e. negligence in the selection of a third party, it is particularly important in Spain to appoint an authorised and qualified professional firm to handle bookkeeping and tax matters and to ensure that it has adequate professional liability insurance. Professional firms incorporated as S.L.P.s or individuals registered as lawyers or tax advisers with the relevant professional associations are required to have the appropriate insurance coverage. A key factor in properly allocating responsibilities is the service agreement concluded with the service provider, which should therefore be as detailed as possible.

2. Liability arising from a cause for dissolution, inability to pay, insolvency or tax debts:

As explained above, a cause for dissolution arises when the company's net assets fall below half of its share capital. If tax compliance and bookkeeping have been outsourced to an external professional firm, the firm should provide clear and comprehensible information on these potential liability risks at least once per quarter as part of a quarterly report.

3. Liability arising from inadequate preventive measures regarding employee protection, data protection, sexual harassment in the workplace, discrimination, anti-money laundering measures, etc.:

Here too, liability can be prevented by complying with the applicable legal requirements and the duty of care. Depending on the sector in which the company operates, it may be advisable, in addition to implementing the relevant internal protocols and procedures, to appoint an external service provider to implement and periodically review the relevant measures (Data Protection Officer, Compliance Officer, etc.).

Your PAE: Recht - Spanien
As a PAE (Punto de Atención al Emprendedor) authorised by the Spanish Ministry of Economy, our firm has direct access to public authorities, the Spanish Tax Agency and Social Security, allowing us to carry out the most important administrative procedures electronically, thereby accelerating the registration process and avoiding the need for visits to public authorities.

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Conclusion

While sole traders (Autónomos) are liable for their obligations with both their business and private assets, shareholders of limited liability companies are generally liable only up to the amount of the capital they have contributed, unless special circumstances arise, such as dissolution, leaving the company or abuse of the company's separate legal personality. It should also be noted that engaging qualified external service providers can minimise or eliminate many liability risks. The careful and timely outsourcing of bookkeeping, tax advisory services and other compliance-related tasks to external professionals can significantly reduce the risk of personal liability and provide greater legal certainty.

Use our legal form self-assessment tool to obtain an initial recommendation when choosing between self-employment and a company.

In our blog "Autónomo or Company" you will find further articles on liability, timeframes, costs, shareholders' residence and other relevant aspects.

Author:

Christoph Sander
Lawyer and Tax Advisor
CEO, Partner, Director
info@sspartners.es
Tel: (+34) 951 12 13 06
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